RBS turns the page on the financial crisis, but not so the Bank of England
When Sir Howard Davies was appointed chairman of Royal Bank of Scotland nearly three years ago, it was with the purpose of addressing five legacy issues which were standing in the way of resumed dividend payments and the Government’s ability to sell down its 70pc stake. Last week’s $4.9bn settlement with the US Department of Justice removes the last of those obstacles. So it’s job done and well done.
The Government needs to move fast in capitalising on this moment. A Corbyn-led Government is looking less likely by the week, but it’s a risk none the less; Labour has vowed to keep RBS in public hands, buying out the minority by selling off a number of assets, including Coutts, the Queen’s bank. The more of RBS the Treasury manages to sell off, the less affordable this outright nationalisation becomes.
As things stand, the Government’s stake is worth around £24bn, little more than half the £45bn of public money used to keep the bank afloat. Even adding back the £6bn the Government creamed off RBS via the so-called “asset protection scheme”, that’s quite a loss to the public purse.
All the same, sale of the stake will finally turn the page on one of the most humiliating chapters in UK financial history. Banks today are much stronger than they were in the run up to the financial crisis. The last Bank of England assessment stress tested the banking sector against an economic catastrophe of positively biblical proportions, and even RBS passed with flying colours. So it’s a moment to savour; for the banks at least, the financial crisis has finally moved into the realms of history.
Not so for monetary conditions, where interest rates are still set as if still in the midst of the maelstrom. The Bank of England missed a trick in not raising interest rates when external conditions in the world economy warranted it six months to a year ago. Back then, the economy could easily have weathered a 1 per cent bank rate. Now we’ve hit another soft patch and with Brexit uncertainties deepening, the chance may have gone.
It must all be a bit dispiriting for Mark Carney, Governor of the Bank of England. His signature “forward guidance” policy was a damp squib, his warnings over Brexit fell on deaf ears, and with little more than a year to run on his contract he’s failed to normalise monetary policy as hoped. This is no criticism of the job he’s done; there have been no obvious mistakes either, which in central banking is in itself an achievement. But markets are fickle, and they now appear more interested in who might replace him than anything he’s got left to say.
So here’s an outrageous suggestion that only half in jest has been floated in Government – former French finance minister and current managing director of the International Monetary Fund, Christine Lagarde.
OK, OK, so even if she could be persuaded, she would be completely unacceptable to Brexiteers. On the other hand, she would, as an exemplar of “global Britain”, be exceptionally useful to the UK in a post Brexit world. Few if any are as well connected internationally, and she would help rebuild bridges with Europe. It’s a long shot, but stranger things have been known.
Bad policy suggestion
On the whole, I’m a fan of the Resolution Foundation and its chairman, the former Tory government minister, David Willetts. But Resolution is also a classic example of O’sullivan’s law – that any think tank which is not overtly right wing will over time become left wing.
With that in mind, I’d like to add my penny’s worth to the tsunami of derision which has been heaped on the recommendations of its “Intergenerational Commission”. I don’t want to argue there isn’t a problem, but the causes of intergenerational unfairness are many and complex; they can’t be addressed with simplistic solutions.
That millennials receive a £10,000 handout on their 25th birthday is quite the most ridiculous idea ever to have come out of a think tank; I’m amazed that people of the calibre of Paul Johnson, director of the Institute for Fiscal Studies, and Carolyn Fairbairn, director general of the CBI – both members of the Commission – could have put their name to such a silly recommendation; it would cost an arm and a leg, it would make little difference to student debt, it is woefully short of what’s needed for the deposit on a house, and is another unfairness to expect older workers on relatively low earnings to subsidise handouts which would in many cases end up funding booze-fuelled holidays in Thailand. There is a good place for this report; in the waste bin.
Why so sanguine? The populist policy agenda of the new coalition government in Italy would in any normal circumstances be enough to send markets into meltdown. Here is a small taste of what the Five Star/ League combo has in mind; a flat rate tax, a citizens allowance for the impoverished south, a general rolling back of pension reform, restoring the retirement age to 60, and the establishment of a parallel currency as a precursor to leaving the euro. Yet panic was there none. Yields on Government bonds barely changed and the stock market actually went up.
The explanation lies partly in the idea that the populists will in time be domesticated, as Syriza was in Greece. Italian Governments come and go with startling regularity, but nothing much ever changes; it’ll be the same this time, markets assume. And it is also because when you drill down into the detail of the policy agenda, it is not as fiscally incontinent as it seems.
Even so, it is overwhelmingly likely that markets are underestimating the risks, both to Italy and the continued integrity of the euro. Complacency in the face of an obvious threat is a classic, late bull market condition. And here we have it in spades.
Handing out £10,000 to millennials would cost an arm and a leg and make little difference to student debt
Moving forward: The $4.9bn settlement is another obstacle removed to allowing the government to sell